Discussion:Deducting S Corp shareholder's individual health insurance on front of Form 1040?
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Discussion Forum Index --> Tax Questions --> Deducting S Corp shareholder's individual health insurance on front of Form 1040?
| 18 January 2007 | |
| So what are you going to do? You have an S Corp client. The owner is the sole shareholder and only employee. The corporation does NOT have a group insurance plan. But the sole shareholder/only employee does, of course, have a health insurance policy that costs him $8000 a year. Are you going to deduct this $8000 on the front of the Form 1040 on line 29, Self-employed health insurance deduction? | |
Michaelstar (talk|edits) said: | 18 January 2007 |
| Tough question. At this point - no I will not be taking this on the front of the return in the situation you have described. I have one such client in this situation and he also does not want to take the risk as we speak today. I am totally in disagreement with this IRS ruling/opinion or whatever it is called.
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Michaelstar (talk|edits) said: | 18 January 2007 |
| I found this information in today's mail - after my post above. It is included in "The Kiplinger Tax Letter" dated 01/12/2007 - What I have included here is para phrased as they have a copywrite issue and quotation for political or commercial use is not permitted of which I do not believe this is either. I have had a subscription to this for a number of years and it is very good so it is worth every bit of the $60 a year I pay for the service.
Look for further guidance and lets hope it arrives sooner rather than later. | |
| 18 January 2007 | |
| Chicken. The plan is in every standard corporate package (along with all the other papers he never filled out.) Have a directors meeting and add some appropriate 61-146 language to make the plan accountable. | |
Michaelstar (talk|edits) said: | 18 January 2007 |
| Okay Dennis - I'll bite..... What is 61-146? | |
| 18 January 2007 | |
| Revenue Ruling 61-146 | |
| 18 January 2007 | |
| Dennis, How does Revenue Ruling 61-146 supersede Code Sec. 1372, which says that a 2%+ S-Corporation shareholder is treated like a partner in a partnership when it comes to the payment of all fringe benefits? This is why the health insurance must get added to the W-2 compensation rather than deducted as an employee benefit. | |
| 18 January 2007 | |
| The ruling basically states that accountable reimbursement is an acceptable corporate health insurance plan. It sets forth the guidelines for the situation where the insurance policy is in the shareholder's name and the corporation pays for it. The premium is includable in W-2 wages and, just as partners, the shareholder is entitled to an above the line deduction on his 1040. | |
| January 18, 2007 | |
| Note that Rev. Rul. 61-146 is available here on TaxAlmanac.
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| 18 January 2007 | |
| The AICPA has proposed a clarification ruling updating and clarifying 61-146. It doesn't add anything that isn't already there but it does illustrate the position many are taking. AICPA | |
| 18 January 2007 | |
| Hi we will be deducting the premium as we have in the past on W-2 and on 1040 adjustment. We feel the rule is not equitable and will be eventually changed. Also if I need to ask I am sure my clients will have the necessary accountalble plan in their corporate papers as Dennis' clients have as well. bye | |
| 18 January 2007 | |
| Dennis, I understand that 61-146 allows corporations to set up such plans. But IRC 1372 supersedes with respect to 2%+ shareholder-employees of S-Corporations.
EDIT 1/18/07: Dennis, As I re-read this thread I realized that I missed what your point was. I understand what you are saying now. Please disregard my posts regarding Sec 1372. WesR, I agree. It is not fair. But fairness is subjective. And taxes and fairness are mutually exclusive issues. Taxes are primarily intended to provide revenue to the government. Fairness is somewhere much lower down on the totem pole of priorities of our Congress people and the bureaucracy of the IRS. Be careful. Taking a position because you "feel" it is not equitable will not get you out of preparer penalties. If you think it will eventually be changed, then why not just put these clients on extension and file when it gets changed. Or amend later. | |
| 18 January 2007 | |
| Hi my positions taken will always be documented for my clients when the need arises. If you've been around awhile you realize that if you are up front prepared and courteous to the IRS and their agents the issues tend to be treated "fairly". All issues are open for discussion and subject to discretion for the client and agent. Some will be resolved in favor of "both" and/or one or the other. While that may not be enough for some it is for most if your clients and you as the preparer understand the issues and the consequences. bye | |
| January 18, 2007 | |
| And remember, that unless you're super conservative (Michael!!), that opinion was not authoritative nor in keeping with the law as we've understood it. It's a long ways from deserving a denial of deductions to an otherwise worthy taxpayer... | |
| 18 January 2007 | |
| I fail to see how any interpretation of §1372 conflicts with the guidlines set forth in Rev. Rul 61-146. Premiums are deductible only as separately stated shareholder/partner items, be it wages or guaranteed payments. The only question is whether or not the corporation has a "plan" for purpose of §106 that would allow the above the line 1040 deduction available to partners. 61-146 shows you how to set that plan up. | |
| 19 January 2007 | |
| http://www.irs.gov/businesses/small/article/0,,id=157049,00.html | |
Death&Taxes (talk|edits) said: | 19 January 2007 |
| Kevin: that headliner has been the lynchpin of perhaps 3 or 4 discussions or sub-discussions, but I'm glad you posted it again so all can read what is the nub of one problem that Michael alludes to. | |
| 19 January 2007 | |
| What approaches will be best in 2007 I think is yet to be decided. For 2006, if you have a S/H with the company paying an "individual" policy premiums, I am reading that this fails the "plan" requirement that would exclude the wage conversion from FICA/MEDI/FUTA. If the taxpayer is going to forgo the 1040 page 1 deduction can he show the 2006 premiums paid as S/H distributions so he avoids FICA/MEDI taxes and potential late deposit penalties if he is a semi-monthly depositor? I have read in several forums that the medical premiums paid for by the S corp for a 2% S/H must be shown as taxable fringe on W2 (even if not taken as deduction on 1040 as SEHI). Thanks. | |
| 19 January 2007 | |
| I believe there is a Revenue ruling that specifically precludes it being handled through a distribution. I think Riley2 posted and I will look around for it. They want the FICA/FUTA. If possible, I just add the entire portion on the last PR of the year, FICA yes, penalties no.
EDIT: Wait a minute, they are not subject to FICA! I'm probably wrong on the revenue ruling also, disregard this post please. Jeez, my light just went out... | |
| 19 January 2007 | |
| Doesn't the FICA only rarely come into play (and FUTA never)? Don't most S Corp sole shareholders make over $100K on the W-2? Unless it is easy to put this so called guaranteed payment/health insurance payment (or reimbursement) on the W-2, it makes since to me to NOT take a corporation taxable deduction for it - which means higher S Corp Sch K-1 income - and if in audit, say, oh sorry, you're right Mr. Auditor, we should have put this on the W-2, please charge us for the MEDICARE of 2.9% on this $8000 of insurance premiums. Here is your $240 with a little penalty and interest. Good afternoon . . . | |
| 19 January 2007 | |
| Kendrick, what makes you think "most" S corp shareholders make >$100k. Many (as in hundreds of thousands, I'm sure) small businesses operate as S corps and don't make that kind of money. | |
| 19 January 2007 | |
| Good point. Excuse my semantics. I was referring to S Corp's where there is $100K plus in profit before sh/ee salaries. | |
| 19 January 2007 | |
| Any other comments on my question from last night? If I advise clients for 2006 that they cannot take the page 1 1040 SEHI deduction and the coporpation has paid the premiums on an individual policy, can they treat the premium payments as S/H distributions since they have not paid FICA/MEDI at this point (salary conversion was anticipated to be 12/31 transaction but no FICA/MEDI required). In other words if they fail the "plan" requirenment for the SEHI deduction do they not have to treat the transaction as compensation? Thanks. | |
| January 19, 2007 | |
| Many of us don't add this to W2, but merely remove the expense from the corp books and move it to S/H loan...and it should still be taken on p1 1040 since that one opinion is not authoritative in any way. By the way, we're not trying to flout the tax rules, merely that W2's get done first, then the year end books and corp returns, which aren't ready in time for W2's. | |
| 19 January 2007 | |
| JR1, relieved to hear your comment. However, why SH loan? I just treat it as a distribution. Because I back the premium out, there is more taxable income, and consequently more AAA income to distribute.
Thanks for any input. You seem to be more on the same page as me regarding this issue than some of the others. | |
| January 19, 2007 | |
| I would deduct it as always on the 1040. Again, that opinion has no authority yet. Don't be scared of it. | |
| 19 January 2007 | |
| Just wanted to make sure your response is to my question about the S corp SH/EE paying his premiums OUTSIDE of the corporation, if you would still deduct them on the front of the 1040. | |
| January 19, 2007 | |
| Makes no difference where he pays them or how, they're deductible under the rules as we've always understood them. | |
| 19 January 2007 | |
| I have a friend who has a cousin who knows somebody that just deducts it as an employee benefit on the 1120S, thereby reducing the pass thru income to the shareholder, and NOT claim it as SEHI.
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| 19 January 2007 | |
| JR1, they've not changed the questions, they've just changed the answers. | |
Michaelstar (talk|edits) said: | 21 January 2007 |
| I have been out of town for a few days and will be back soon to catch up but whether the IRS opinion is authoritive or not in your mind, until the subject has been settled in our clients favor, without discussing where we are at now does not provide us the authority to just deduct this expense on the front of the 1040 because we believe the IRS is wrong - even though we all seem to agree they are missing something here.
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| January 21, 2007 | |
| Michael, all I'm trying to say is that is not definitive by any means, and that Headliner is NOT authoritative in any way, esp. since it flies against everyone's prior understanding of the rules. You have no obligation to follow it. Now you have to listen to your own society's thoughts on the matter, but the folks that I'm listening to express what I expressed above. You clearly have the professional option at this point, until further clarification comes, to continue treating this as you have in the past. When we get more clarification, then we're on notice for whatever that means. Until then...we're free to choose, and there's no compelling reason not to choose to continue this as we have. | |
Actionbsns (talk|edits) said: | 21 January 2007 |
| I saw a link the other day on another thread, to this IRS Headliner. At the time I didn't have time to read it and now I can't find it. Can someone direct me back to it? I have at least three clients that could need everything changed as I prepare their W-2's. It's not too late to change things, just cumbersome if I have to. In Hawaii the employer is required to provide health insurance, but the insurers don't offer it to a single member corp - you need at least two unrelated people to qualify. So in this case people provide themselves with private health insurance and to my knowlege, the state is good with that as long as the corp pays it. Can someone tell me more about IRS Headliners also. I'm not sure of their significance. Are they simply discussions? JR it doesn't sound as though they have the same impact as a Revenue Ruling. | |
| January 21, 2007 | |
| In the yellow search box on the left of the screen, type in Headliner and press enter. There are twelve pages which contain this term. One of them will be the one you are looking for.
- Tim Doyle, TaxAlmanac Moderator - Talk to me 17:16, 21 January 2007 (CST) | |
| 21 January 2007 | |
| I thought I just read where IRS has this under consideration because of the states that don't allow health insurance to be in the name of the corporation. I'll see if I can dig it up. | |
Actionbsns (talk|edits) said: | 22 January 2007 |
| It seems to me that Headliner 163 is making an argument to exclude S Corp medical as a fringe benefit by siting sec 1372, claiming that it doesn't come into play because the sole stockholder could not be considered a partner and therefore the SH could not be considered self employed under Sec 162(l). But it overlooks entirely REvenue Ruling 61-146 which allows an employer to re-imburse an employee for medical insurance paid out of pocket even if a group plan is in place and those premiums would not be considered to be part of wages. That ruling would allow the corporation to do the same thing for the sole SH. In which case, you would have the equivalent to a fringe benefit. It seems to me that the Secretary is exercising his/her rights under IRC sec 162(l)(5)(B) which allow the secretary to make adjustments in the application of the subsection "as the Secretary may be regulations prescribe". So are they just trying to stir up a lot of discussion and debate with all this? And is that, in fact, what the headliner is - a discussion and debate about an issue? | |
Pantherdan9 (talk|edits) said: | 23 February 2008 |
| I have a client that is the 100% S/H of an S Corporation. The S corporation is the owner of a HRA 105 plan and pays all of the insurance premiums and reimbursements for him and his family. Does this get treated as W-2 income to the S/H and corresponding expense to the S-Corp and an above the line deduction on the 1040? This seems like a double deduction to me? Any guidance is appreciated. | |
| 2008-02-23 | |
| http://www.taxalmanac.org/index.php/Discussion:Hot_news_on_S_corp_Health_Insurance_%28Notice_2008-1%29. Check this thread, which is just a few lines below your post. | |
Pantherdan9 (talk|edits) said: | 23 February 2008 |
| Thank you for the link. Do you know if the reimbursements from an HRA 105 are included in the definition of "health insurance" or will those be distributions if paid by the S-corp and deducted on the Schedule A? Thanks | |
| 28 January 2009 | |
| Pantherdan9's question was never answered. In light of Notice 2008-1, are most people treating HRA 105 plans for 2% shareholders as health insurance or not? | |
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